Chapter 3 & 4 (Accrual Accounting & Understanding Financial Statements) Flashcards
Revenue Recognition Principle
1) Identify the ________ with a customer
2) Identify the performance _____________ (promises) in the contract
3) Determine the transaction _____ ($)
4) Allocate the transaction price to the performance obligations in the contract
5) Recognize revenue at the point the performance obligations have been _________
- Under accrual accounting, the recognition of _______ is matched to the recognition of revenue in the same period.
1) contract
2) obligations
3) price
5) satisfied
expense
- A company recognizes revenue when the company transfers promised goods or services to customers, in the amount it expects to receive
Scenarios:
1) Cash received when revenue is earned: Debit = ____, Credit = Revenue
2) Cash received before revenue is earned (before company delivers): Debit = Cash, Credit = ________ revenue. Once company delivers: Debit = Unearned Revenue, Credit = ________
3) Cash received after revenue is earned: Debit = Accounts receivable, Credit = Revenue. Once cash received: Debit = Cash, Credit: Accounts receivable
1) Cash
2) Unearned, Revenue
-Expense Matching: cost incurred to generate revenues are recognized in the same period that revenue is realized
Scenarios:
1) Expense incurred & Cash Paid: Debit = Expense, Credit = ____
2) Cash paid before expense incurred: Debit = _______ Expense, Credit = Cash. Once expense incurred: Debit = Expense, Credit = Prepaid Expense
3) Cash paid after expense is incurred: Debit = Expense, Credit = Accounts _______. Once cash paid: Debit = Accounts Payable, Credit = Cash
1) Cash
2) Prepaid
3) Payable
If paying off principal and interest on a note payable, the amount on the notes payable would be the _________, while the interest would fall under expenses. Both of these combined will equate to the total ____ decrease.
principal, cash
- Adjustments to prepaid expenses and unearned revenues are referred to as _________. Adjustments to accrued expenses and accrued revenues are referred to as ________.
- The process of allocating the cost of buildings and equipment to the periods benefiting from their use is called _____________; straight-line method estimated by dividing the acquisition cost of the asset by its estimated ______ life in years
deferrals, accruals
depreciation, useful
Deferred Revenues: previously recorded liabilities that were created when cash was received in _______, and that must be reduced for the amount of revenue actually earned during the period.
- An adjusting entry never includes ____
- Interest rate is measured ________ (as opposed to monthly)
- Interest Revenue = Principal * _________ ____ * ____ period (expressed as fraction of a year)
advance
cash
annually
Principal * Interest Rate * Time Period
-Deferred Revenue = ________ revenue (paid now, earn later)
- Accrued Revenue = ____________ (earn now, paid later)
- Deferred Expense = _______ Expense (pay now for later service)
- Accrued Expense = ________ (receive service, pay later)
Unearned
Receivables
Prepaid Expense
Payables
- Closing the Books: transfer net income or loss to retained earnings. Establish a zero balance in each temporary account (________, _______, __________) to start the next accounting period.
- Classified Balance Sheet: lists current assets/liabilities vs. non-current assets/liabilities
- Current assets are assets that will be consumed or turned into cash within ___ year. Current assets are listed in order of _________ (how easily to convert an asset to cash).
- Current liabilities are liabilities that will require payment within ___ year. Current liabilities are listed in order of _________ (how long is the time period).
revenues, expenses, dividends
one, liquidity
one, maturity
1) Gross Profit (also referred to as gross margin) = Net _____ - ____ of goods sold
2) Gross Profit - operating expenses = ______ from operations
3) 2) +/- non-operating expenses = Income before _____
4) 3) - Income Tax Expense = Net Income Earnings Per Share
1) Net sales - cost of goods sold
2) Income from operations
3) Income before taxes
Ratio Analysis
- used to evaluate operating performance and financial health of a company
- Trend analysis: compares the ____ company over time
- Benchmarking: compares a company to ____ firms
same
peer/other
- Liquidity: ability to pay _____ term financial obligations. Assessed using the _______ ratio = (current ______/current ___________). Ratio > _ implies the company has sufficient current ______ to pay its current obligations.
- Solvency: Ability to pay obligations over the ____ term. Assed using the ____-to-total ______ ratio = (total ____________/ total ______). The more debt relative to assets (higher ratio), the ______ risk of insolvency
short, current, (current assets/current liabilities), >1, assets
long, debt-to-total assets, (total liabilities/total assets), higher
Profitability: Ability to generate profit from the firm’s operations. Assessed using the return on ____ ratio = (Net ______/Net _____).
- higher ratios indicates a more ___________ company.
- helpful in comparing different-sized firms.
Free Cash Flow: Cash flow available after maintaining current level of capital investment.
- Formula: Operating Cash Flow - Capital _____________ (on PP&E)
- Indicator of availability to ______ operations, repay ________, and/or pay __________.
sales, (Net Income/Net Sales), profitable
Operating Cash Flow - Capital Expenditures, expand, lenders, dividends
Intangible Assets: Assets that lack a _________ presence, such as brand names, copyrights, patents and trademarks that a company acquires.
- Return on assets (ROA) = (Net ______/ Total ______)
- Supplies Expense = Beginning Supplies + Bought Supplies - Ending Supplies
physical
(Net Income/ Total Assets)
